Do you have a ROTH 401(k)? Does your company even offer one? Do you understand how a ROTH 401(k) works? If you answered no to these questions it is best you read this post and consider talking to a financial advisor. A ROTH 401(k) can be your new best friend in your retirement if used properly. While ROTH IRA’s are limited by income being phased out at $131,000 for individuals and $193,000 for married couples ROTH 401(k) accounts have no income limitations.
And while IRA’s are limited to $5,500 for those under age 50 and $6,500 for those over 401(k) accounts are a lot different. The 2015 annual contributions for a 401(k) is $18,000 for all contributions regardless of Traditional or ROTH accounts. And those over the age of 50 can contribute up to $24,000 in a year.
The main difference between a Traditional and ROTH account is how it is taxed both before it goes in the account and when it is withdrawn. On a Traditional 401(k) it is done on a pre-tax basis and withdrawals are taxed 100 percent as ordinary income. In a ROTH 401(k) the funds are taxed prior to going into the account, and all withdrawals are tax-free. This is an advantage for younger workers who are in a lower tax bracket now and will likely be in on that is as high or higher than the one they are in now.
Anyone who’s employer offers a ROTH 401(k) is eligible to contribute. The costs are a little higher with a ROTH 401(k) for the employer, so many smaller firms do not offer them. However, larger companies are beginning to offer them on a regular basis now. If your company does not offer a ROTH option the best way to get one is to ask them simply to start. If you do not ask and they are not aware people want a ROTH option it is unlikely they will offer it.
When you have an employer match and are contributing to a ROTH account, the matching funds will go into a Traditional account. The reason for this is because the funds have not been taxed and, therefore, will be upon their withdrawal. And that portion of the funds will be taxed as 100 percent ordinary income.
Unlike a ROTH IRA, there is no early withdrawal of the principal. In an IRA one can withdrawal the principal of a ROTH account without penalty. Remember this is not the case with a ROTH 401(k).
If you change or lose your job the ROTH 401(k) may be rolled into a ROTH IRA. Or if the new employer has a ROTH version it may be rolled into that as well.
And prior to 2006 the ROTH 401(k) was temporary and not permanent in nature. But since 2006 there was legislation that was passed making it a permanent aspect of the 401(k) world.
If you have any questions on ROTH IRA’s or 401(k)’s feel free to contact me.
